Illuminating Luminaries

By Richard Vedder

While my sidekick Andy Gillen was holding down the fort at CCAP and fighting the financial aid establishment that attacked his fine study on that topic with smear attacks rather than thoughtful and incisive criticism, I was in Indianapolis at a meeting of Lumina Foundation grantees, hearing the results of their research, much of which was quite impressive.

Lumina is a positive force in higher education, wanting to increase efficiency and affordability in higher education. At the same time, they want to do so in order to meet a goal of vastly more college graduates --60 percent. I have real doubts whether that is an important goal --who is to say what the optimal proportion of college graduates is, or where adding more college graduates adds more to costs than to benefits? But put that aside --Lumina has some researchers doing some neat research.

Let me cite just one example. Nate Johnson is a Florida researcher who is doing excellent work in measuring the "cost per degree." One dimension of that effort is estimating the cost of college attrition. College attrition rates are typically over 40 percent, but that does not mean 40 percent of resources are devoted to educating kids who drop out --since most drop out early, and are educated comparatively cheaply as freshman and sophomores (large classes, lower priced teachers, etc.) In fact, the true cost of attrition is probably less than 20 percent --still, however, a huge amount.

Then there is the issue of kids graduating with more hours than needed to meet major and graduation requirements. The "transcript cost" of getting a degree in Florida is 20 percent or so higher than the "catalog" cost --the cost of getting a degree if degree requirements were precisely and minimally met. The "full attribution" cost (taking account also of drop-outs as well as students taking more courses than mandated) is estimated to be about 50 percent above the catalog costs--put differently, in a world without any attrition and where students followed catalog requirements precisely, costs per student would be roughly one-third less --big dollars. It costs society a lot when students change majors or drop out of school --what can we do to incentivize students and faculty in a way that would reduce those costs. Useful research.
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If you do want to vastly expand enrollments, and President Obama, Lumina, and many higher education gurus do, it is assumed that public education must expand significantly. But is that so? The market share of public universities is in decline. More and more, students are going to private institutions, especially the for-profits.

I showed that if you invested $100 in an index of publicly held for-profit universities at the beginning of this decade, those stocks would be worth nearly $800today, but if you instead bought a S&P Stock Index Fund, you would have about $60 today. Proprietary education is hot today on Wall Street, for good reason.

Enrollments are growing by double digit percentages annually, and companies like Apollo (University of Phoenix) have pre-tax profit margins equal to one-fourth to one-third of revenues. The University of Phoenix paid over $306 million in federal corporate income taxes last year, while, say, the University of Michigan received roughly the same amount as subsidy from the state government. Despite a decidedly unlevel playing field, the for-profit market share has gone from less than one percent of enrollments a decade ago to over seven percent today. My junior sidekick Matt Denhart estimates that 23 percent of increased enrollments from 1998 to 2005 were at for-profit institutions (compared with 2 percent from 1984 to 1990), and I would guess the current proportion is at or above 30 percent. To discuss the growth of higher education without a major discussion of for-profits is absolutely crazy.

Questions abound --why have the for-profits gained enormously in market share (it will probably pass 10 percent within a half dozen years), despite public policy favoring their competitors? Why do the for-profits see huge economies of scale in operations, while the traditional universities do not? Why do the not-for-profits build buildings but the for-profits rent buildings constructed by others? I hope to ask for-profit leaders these and other questions in coming months, thanks to Lumina.